India Hopes to Up Oil Imports After Iran Deal

India has developed a system with Iran to bypass U.S. sanctions on buying Iranian oil.

India is hopeful that crude oil supplies from Iran would nudge up following a deal between Tehran and major world powers that could head off further sanctions on Iranian crude. Though an existing barter trade system between India and Iran to bypass western sanctions may suffer as payment channels to Tehran are expected to normalize.

The landmark agreement between Iran the U.S., along with other permanent members of U.N. Security Council and Germany, will run for six months and includes a requirement that Iran halt efforts to improve its uranium-enrichment capacity and allow increased monitoring of its nuclear program.

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The deal, announced Saturday, didn’t include any easing of sanctions on Iran’s sales of crude oil. But Indian industry officials said the pact was a welcome development and should help over time to boost New Delhi’s crude oil imports.

Iran was the second-largest supplier of crude oil to India until around two years ago, before the sanctions were imposed, but Iranian crude supplies have gradually declined in line with a U.S. requirement that India and some other countries — including China and South Korea — steadily diminish their purchases.

Another private Indian oil company, which has been importing crude from Iran, was optimistic about an increase in supplies.

“It’s a good development. It should cool down the crude oil prices little bit,” said Lalit Kumar Gupta, managing director and chief executive of Essar Oil Ltd. “We will continue to follow the government of India guidelines on imports of crude from Iran,” he added. India’s crude oil imports from Iran declined by around 27% to 13.11 million tons in the financial year ended March 31. Imports between April and August this year were estimated at 2 million metric tons.

An industry analyst said that it was too early to comment on how the deal struck between Iran and the major powers would play out for New Delhi, but added that there were likely to be both pros and cons.

One boon for India could be that more companies might be willing to offer re-insurance for tankers transporting crude from Iran, which has emerged as a stumbling block in recent years, according to Praveen Kumar, an analyst with Singapore-based Facts Global Energy.

On the other hand, Iran might gradually withdraw certain incentives it currently offers on oil sales to prevent buyers switching to other suppliers, he said.

Iran has been trying to woo India by offering incentives including tanker services and insurance cover ‎on shipments in order to stay competitive, trade executives say.

Under U.S. sanctions, it is very tough for Iran to receive money in dollars for its crude oil. To get round this, India and Iran entered what is essentially a barter system in June 2012; Indian oil importers deposit rupees into an Indian bank and rice traders and other exporters withdraw funds from the same account once their shipments have been received in Iran.

Mr. Kumar said that Iran might now look to repatriate its money from the Indian account for oil payments instead of waiting for the barter system.

However, a senior Indian trade executive said he did not foresee any changes happening to the trade system with Iran immediately.

“There is no relaxation on the banking front (with Iran),” said Ajay Sahai, director general of Federation of Indian Export Organisations, adding that the latest developments indicated that the “U.S. is moving positively on Iran.”

Iran has stepped up purchases of Indian agricultural commodities such as basmati rice and soymeal as well as pharmaceuticals and automobile parts under the rupee payment mechanism.

Mr. Sahai said that Indian exports to Iran would likely continue at the same pace even if the rupee payment mechanism was dismantled since local exporters here have established their market in the Middle Eastern nation.

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